Tax Tip 271: What is the Tax Rate for Trusts?

Some people ask me what the tax rate is for trusts.

Trusts are treated as a separate tax entity, but they generally do not pay tax. They are what is called a ‘flow through entity’ with any income received flowing out to the beneficiaries of the trust. When this happens, it is the beneficiaries who will pay tax on the income of the trust when they become entitled to that income.

Where the trust retains income or doesn’t make any beneficiary entitled to that income then the trustee of the trust will be taxed on that income at the top marginal tax rate.

There are some exceptions to these rules though, for example the trustee of a trust set up under a will might retain the income and be taxed on the income tax rate of the child beneficiary of that will.


Example

Homer sets up a discretionary trust which invests in shares. Homer is the trustee and distributes the trust income to his 3 children who are all over the age of 18 and are not working. The trust income for the year of $60,00 and Homer makes each child presently entitled to $20,000 in income.

The trust itself does not pay tax, Homer as trustee does not pay tax on any of the income, but the children who are entitled to the income add the $20,000 to their other taxable income for the year and pay tax on this. Since none of them are working they will not pay any tax on this income.

Note that if Homer as trustee does not transfer the $20,000 to them, they are still treated as if they had received it for tax purposes and will be taxed on it. They will be owed this morning by Homer in his capacity as trustee and can demand payment and sue for it (another topic for a legal tip).

 

A trustee may also be assessed on the income for a non-resident beneficiary so that the trust pays the tax attributable.

This vastly impacts net trust income too. Franked Dividends and some CGT amounts (as an example) may be excluded as income.

eg The Eddie Trust has investment income that includes the following tax elements from the ETF and Management Fund tax statements:

- Franked Income $10,000 (Credits $3428)
- Other trust income $1500
- Foreign Income $8,000 (Credits $2445)
- Discounted Gains (Not Aust Property) $10,000
- Discounted Gains (Not Taxable Aust Property) $10,000

The trustee decided to distribute 100% to Van Halen who is non-resident. If the trustee was tohave distributed to resident individuals the net trust income is $35,373. However the following adjustments are required

• Franked income is not assessable income to the beneficiary. The franking credits are lost
• Foreign income is not a element of trust income as a non-resident is not subject to Australian tax on foreign source income. Only AU source
• The CGT element for Not Taxable Australian Property is exempt. Non-residents are only subject to income tax on Taxable Australian Real Property (TARP held directly or indirectly.
• The CGT TARP amount is not eligible for the 50% CGT discount.

The Net Trust income is now $11500. Tax will be assessed at non-resident scales to the trustee.

The non-resident beneficiary should lodge a return in Australia to declare this same income AND claim a credit for the s98(3) tax assessed to the trustee AFTER it has been assessed and paid. If the non-resident has no other Australian source income they may elect not to lodge as the trustee assessment is full and final. If they have other sources of income or deductions etc then a lodgement is required.